Letters of credit in Australia

July 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

July 2015 Issue

In Griffin Energy Group Pty Limited (Subject to Deed of Company Arrangement) & Anor vs. ICICI Bank Limited & Ors [2015] NSWCA 29 the Court of Appeal, in a joint judgment, reaffirmed an earlier decision of the New South Wales Supreme Court in holding in substance that: (i) letters of credit must be construed strictly according to their terms, and not by reference to any supporting or related materials; and (ii) the letters of credit in question expired before the liabilities against which they were drawn became due and payable, with the result that any subsisting security derived from the existence of the credits was lost.

ICICI Bank Limited (ICICI Bank) was the issuing bank under the three letters of credit (which together totalled $150m). The letters of credit derived from the sale in 2011 of the Griffin Coal Mining Company (Griffin), a coal mining operation in Collie, Western Australia, by its then appointed administrators, KordaMentha. The purchaser was Lanco Infratech Limited (Lanco), a large Indian coal miner. The purchase price was around $740m. Of this sum, roughly $490m was paid at the time of acquisition, in 2011, with title passing in full at the time of sale, and the balance to be met by two deferred payments. The first payment of $100m was to be made at the two year anniversary, and the second at the four year anniversary for $150m. All of this was documented in a lengthy sale agreement which was prepared by lawyers of the administrators (Sale Agreement).

Both of the above deferred payments were supported by standby letters of credit issued by ICICI Bank, which also named Standard Chartered Bank and National Australia Bank as reimbursing banks.

The terms of the letters of credit were set out in SWIFT type language – expressing the key terms in very simple commercial language. In addition to their ordinary terms, they expressly incorporated the International Standby Practices (ISP 98) for standby letters of credit.

The first deferred payment was paid in full, and the second deferred payment fell due on 28 February 2015. By this time, Griffin was in financial distress, and it was clear that the standby letters of credit were the primary means by which the administrators would recover the outstanding instalment of $150m.

As the maturity date on the final letters of credit drew near, and the letters were examined by those seeking to enforce them, the following became clear. The due date for payment of the final instalment of $150m under the Sale Agreement was 28 February 2015, a Saturday. Under the Sale Agreement (Clause 1.1) a business day was defined as: “a day which is not a Saturday, Sunday or bank or public holiday in Perth, Western Australia”. Clause 1.2(g) of the sale agreement then provided that “if the date on or by which any act must be done under this document is not a Business Day, the act must be done on or by the next Business Day”. Monday 2 March 2015 was a Labour Day public holiday in Perth, Western Australia but was not a public holiday in any other state or territory of Australia. Thus, payment did not become due under the sale agreement until Tuesday 3 March 2015.

The letters of credit required that the party presenting them confirm that the deferred payment of $150m was “due and payable” meant that the letters of credit could not be presented until Tuesday 3 March 2015.

Turning to the letters of credit, the expiry date under the letters of credit was 1 March 2015, a Sunday. A business day was defined in the letters of credit to mean “any day (other than a Saturday or a Sunday) on which banks are open for general business in Singapore and Australia”. By their incorporated terms under ISP 98, when the expiry date of a letter of credit fell on a non-business day, the expiry date is extended to the first following business day: refer ISP 98, clause 3.13.

Accordingly, it became clear that if – applying ISP 98 and general principles of interpretation applicable to letters of credit – Monday 2 March 2015 was a day on which “banks were open for general business in Singapore and Australia”, then the letters of credit would expire at the end of business on Monday 2 March 2015, in circumstances where the corresponding liability under the Sale Agreement was only enlivened on Tuesday 3 March 2015.

The key question before the Court of Appeal therefore became whether – applying ISP 98 and the principles referred to above – Monday 2 March 2015, was a day on which “banks were open for general business in Singapore and Australia”. Australia has six States – New South Wales, Victoria, Queensland, South Australia, Tasmania and Western Australia. On Monday 2 March 2015, banks were open for general business in all of those States, save for Western Australia. On the question as to whether banks needed to open in all States to meet the requirement in the letters of credit, the New South Wales Court of Appeal opined: “[a]s a matter of ordinary English something can exist in Australia without existing in all Australian States. For example the Great Barrier Reef, saltwater crocodiles and Tasmanian Devils are all found in Australia, but not throughout Australia. Sugar cane is grown throughout Australia, but not in all Australian States and Territories”.

Using this process of reasoning, the Court of Appeal found that banks were open for general business in Australia on Monday 2 March 2015, even if they were not open for general business on that day in one of the six States. The result was that the letters of credit expired before the deferred payment fell due under the Sale Agreement.

Griffin had argued that a legalistic interpretation must yield to the clear intention of the parties (namely that the letters of credit be effective security for the underlying payment obligations) and also as a matter of common sense. (In the first instance, an attempt was made to construe the letters of credit so as to accord with the sale agreement, but this was later abandoned in the face of clear authority precluding this approach.)

ICICI Bank and Lanco successfully argued, firstly that the letters of credit were standalone instruments and must be construed without regard to any provision of the sale agreement (Wood Hall Ltd v The Pipeline Authority), and secondly that the letters of credit must be construed by reference to what a reasonable business person would have understood the terms to mean, having regard to the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract (Electricity Corporation v Woodside Energy Ltd).

Ultimately, the Court of Appeal agreed with the approach taken by ICICI Bank and Lanco and confirmed that the letters of credit expired before they could be drawn upon – an impractical (and costly) result for the beneficiary but a result that accorded with the principles of law that underpin these types of commercial instruments. Griffin has sought special leave to appeal to the High Court of Australia.

Beau Deleuil is a partner at Quinn Emanuel Urquhart & Sullivan. He can be contacted on +61 2 9146 3777 or by email: beaudeleuil@quinnemanuel.com.